If you're interested in diversifying your assets, or you're concerned about the consequences of economic downturn, it is important to understand the factors that influence the price of gold. The official price is set twice a day, and as with all commodities, gold prices depend on demand and supply, along with speculation as to whether the price will rise or fall in the future. The price of gold is in fact one of the main indicators of the state of the global economy. Below we'll take a look at some of the factors that cause the price of gold to change.
Central banks store gold bullion reserves to provide a hedge against currency inflation. They are among the biggest buyers and sellers of gold so their actions can have a significant impact on the price of gold worldwide.
Central banks can also set interest rates which can in turn affect the price of gold. Low interest rates tend to discourage people from investing in paper currencies and instead put their money into precious metals like gold in the hope of more profitable returns. When interest rates are high, more people tend to invest in paper currencies, causing the price of gold to fall.
Confidence in the US Dollar
When the US dollar is strong, the price of gold is nearly always low. The simple reason for this is that a strong dollar gives people more confidence in storing their money in cash savings, and so fewer people feel the need to invest in precious metals.
On the other hand, a weaker dollar exchange rate will tend to cause the price of gold to rise as more and more people seek to hang on to the value of their money. Presently, the intrinsic value of the US dollar is being eroded at a record pace, which is why so many people are now choosing to invest in the golden metal. The World Bank President, Robert B. Zoellick, recently said "There is little the United States can do about the sinking value of the dollar except restore growth in its economy."
Demand for gold jewellery has risen quite considerably in India, China and the USA. India has the largest market for gold jewellery, representing 552 tonnes of gold in 2012 alone and an estimated 6,300 tons of gold in the last 10 years, investing over $160 billion, which has now doubled in value to $335 billion.
And there's China, which is the fastest growing market for gold jewellery, accounting for 518 tonnes of gold in 2012. Plus there's the US jewellery market, which accounted for 108 tonnes of gold in 2012.
Asian investors remain highly optimistic about gold's future price, with a World Gold Council survey finding 66 percent of Indian and Chinese consumers expecting the price of gold to rise over the next five years, that's up from 62 percent in May.
In recent years the rising cost of extracting gold from the earth, along with miners strikes and political turmoil, has caused a decline in gold-mining production worldwide, leading to a reduction in the amount of new gold reserves coming onto the market. World gold production has been steadily declining since it peaked in 2001. The world's biggest gold producers are China, Australia, United States, Russia and South Africa.
Major world events can have a significant impact on the price of gold. Such events include wars, terror attacks, natural disasters and social unrest. One example is the sharp increase in the price of gold after the events of 9/11. And in the 12 years since 9/11 the price of gold has risen by around 700 percent. Gold has always been considered a safe haven to protect the value of money in uncertain times. For example, financial historian and economist, Peter L. Bernstein, once said: "Because gold is chemically inert, it doesn't ever tarnish, it gives people a sense of being in touch with eternity. I think this is the magic of it. It stands for security and assurance."
So in conclusion then, higher gold prices are indicative of global economic uncertainty, as investors look to move their money out of paper currencies and into a form that can retain its value over the long term. And for most investors, the obvious choice is gold. The increase in demand for gold jewellery, along with a weak dollar and reduced gold production, has contributed significantly to the increase in gold prices over the last decade. Gold bullion's status as a safe-haven is enhanced in times of economic uncertainty, which explains why a record number of people are now setting up gold IRAs to protect the value of their assets.
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